New perspectives on the state of manufacturing
INSIGHT ARTICLE |
To compare the manufacturing industry of the past 12 months to a roller-coaster ride is, to say the least, a bit of an understatement. But that doesn’t make it any less accurate.
Right now, the manufacturing environment is relatively stable, with 1-1.5 percent growth; in fact, some sectors—particularly automotive, aerospace and construction materials—have had record-breaking years. But economics are cyclical, and other sectors—energy, agriculture and general industrial manufacturing, among them—are experiencing a decrease in demand, limiting their profitability and growth. The ripple effect of decreasing demand is being felt in economies around the world as well. It will take some time to recover from the overcapacity that is putting a damper on profitability and growth.
I recently attended a board meeting at the National Association of Manufacturers along with RSM US Partner (and NAM board member) Karen Kurek. We wanted to gain some insights into the impact that the global economy, government regulations and the political landscape are having on the state of the industry. What we heard brought some details of what we have seen in the industry into sharper focus.
There certainly are a number of challenges ahead. As British historian Niall Ferguson said in his presentation to the NAM board, the United States suffers from, among other things, an “excessive complexity of regulation.” In addition to reducing the burden of regulation to create a level playing field among industry sectors, he recommends fixing entitlements, eliminating frivolous legal issues and reforming tax codes. He likened us to the movie The Revenant. We have been mauled, but we can make a comeback if we address the challenges in our country.
Many analysts agree that the relationship that the United States has with the rest of the world is changing. Economist Paul Krugman noted recently that capital is fleeing troubled economies around the world and much of it is headed to the United States, pushing up the value of the dollar and making our exporting industries less competitive.
There is a continued inflow of capital as foreign investors build factories (look at the automobile industry) or buy U.S. companies. This inflow was confirmed by last year’s RSM Monitor report as well as by a recent report from the IBM Institute for Business Value on global location trends, which notes that the United States “continues to be the top destination for foreign investment in the world.” There are some drawbacks to this, of course; chief among them is the competition it brings to our shores. But there are some benefits as well, particularly when it comes to local economies and jobs. South Carolina Governor Nikki Haley spoke to the board about the success that her state has had in attracting a number of foreign auto manufacturers through incentives and “customer service.” If nothing else, we are a location-driven economy.
Millennials are not flocking to the industry for careers as earlier generations have done. This may be in part because of the stagnation of wage growth. The number of old middle-class manufacturing jobs has shrunk due to automation and the movement of our country to a service as opposed to a manufacturing economy (just look at what is happening in China). Attracting and retaining a skilled workforce continues to be a focus of many in the NAM community. The challenge we face is for high schools, colleges and trade schools to produce students with the science, technology, engineering and math skills who will help U.S. manufacturers remain competitive and innovative.
As Ian Bremmer, president of the Eurasia Group, told the board, we are experiencing “a dramatically more fragmented world than at any point since World War II.” Manufacturers may continue to be denied any clarity in a political landscape that can have a profound effect on their businesses. In the meantime, the industry will seek out opportunities in a volatile global market that rewards some sectors and leaves others uncertain about what the future may hold.
Despite the uncertainty in our current manufacturing environment, there are opportunities for companies to take control of their own future. Strengthening customer relationships, renegotiating pricing agreements to add protection in a volatile world, evaluating acquisitions for either strategic or operational purposes, and collaborating with customers are both challenges and opportunities. The winners will focus on long-term change, not just the current period’s results.